Trade Liberalization Episode Research Articles

Dynamic trade, education and intergenerational inequality

I present a dynamic trade model spanning many countries to explore the transitional paths of trade-induced inequality. By incorporating capital-skill complementarity, human capital accumulation, and capital accumulation, this paper examines the exact transitional path following a shift from autarky to trade. It reveals that trade increases the skill premium, skill share, and real wages for both skilled and unskilled workers in the majority of countries at the steady state. However, the short-term impact of trade on inequality is more pronounced. The exact transitional path indicates that the dynamic of trade-induced inequality is influenced by the flexibility in adjusting factor supplies during the transition at different stages, and education alleviates approximately 50% of trade-induced inequality in the long run. Furthermore, the analysis illuminates the observed patterns of skill premium in recent trade liberalization episodes in Mexico, China, and South Korea, and raises the possibility that globalization may intensify intergenerational inequality.

Import tariffs and transport prices

AbstractThis paper discusses how import tariffs interact with transport prices in episodes of trade liberalization. We develop a model of a transport industry that operates under imperfect competition and economies of scale. Double marginalization due to market power reduces the effects of trade liberalization, while a larger trade volume may support them due to economies of scale. We use a large data set of maritime transport data and combine them with tariff data to find that economies of scale beat market power: a decline in the tariff implies a decline in freight rates.

Trade and labor market segregation in Colombia

AbstractGary Becker's theory of discrimination argues that increasing competition will reduce discrimination by reallocating market share to less discriminatory firms. We develop a simple model in which increased competition can also affect discrimination by affecting firm‐level hiring decisions. We use the 1984–1991 Colombian trade liberalization episode and plant‐level data to investigate this claim. We find that plants in industries that faced the greatest reductions in tariff protection increased the female share of their workforce more than plants in industries that saw little or no reduction in tariffs. In addition, we find that exporting plants tended to employ a higher share of female workers than non‐exporters did. In contrast, we find little evidence that trade liberalization drove discriminating plants from the market.

Infrastructure quality and trade liberalization

It is difficult to establish the impact infrastructure has on trade balances due to confounding factors. Our empirical approach leverages on episodes of trade liberalization, interacting such episodes with infrastructure. Providing a simple extension to the gravity model, we find that infrastructure quality differences between trade partners result in trade imbalances, which liberalization then accentuates. For robustness checks, we interact the liberalization indicator against other confounding variables and do not find such consistent effects. We conclude that lack of quality infrastructure in developing economies contributes to larger trade deficits, and infrastructure development should be supported alongside trade liberalization.

The effect of trade on market power — evidence from developing economies

ABSTRACT The rise of market power has sparked off increasing public debate over the past decade. Using a novel large-scale firm-level dataset, this paper examines the effect of trade liberalization on corporate market power in emerging and developing economies. We find that opening up to trade significantly reduces market power by promoting competition and improving resource allocation. The cumulative impact is estimated at 4 percent reduction in average markups over a 5-year horizon post each trade liberalization episode. We also draw on machine learning algorithms to account for nonlinearities in the relationship and show that trade reform is complementary to other structural reforms.

The Baker Hypothesis: Stabilization, Structural Reforms, and Economic Growth

In 1985, James A. Baker III's “Program for Sustained Growth” proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater openness to foreign investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the ten-year period after stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.6 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the unprecedented increase in growth that has taken place in EMDEs since the early 1990s.

Good Connections: Bank Specialization and the Tariff Elasticity of Exports

In this paper, we show that exporters react more strongly to a cut in tariffs by a distant country when their banks have already been specializing in funding exports to this country. To make our case, we build upon a theoretical model where an informational advantage provided by the exporter's bank results in a lower distribution cost in the destination country. We test the implications of this model for French exporters using the 2011 free trade agreement between the European Union and South-Korea as a quasi-natural experiment. We measure a bank's specialization in Korea using granular information on bank-firm credit lines and firm-level exports in the years preceding the agreement. We assess how customers of different banks react to this trade liberalization episode using detailed information on the bilateral tariff cuts and disaggregated data on French export flows at the firm-product level. We find robust evidence that the specialized lenders help exporters to respond more strongly to changes in tariffs. The effect is strong for all firms along the extensive margin, but only for less productive exporters along the intensive margin.

Organizational Form and Trade Liberalization: Plant-Level Evidence

This paper studies how firms’ internal organization shapes the impact of international trade. Using establishment-level data from the U.S. Census and a difference-in-difference specification, I find that, relative to standalone firms, conglomerates are more likely to restructure after trade liberalization episodes, focusing on their core competency and improving firm productivity and product market performance. Adjustments through the extensive margin account for the majority of the productivity growth differential between conglomerates and standalones experiencing trade shocks. Aggregate industry productivity remains relatively unchanged in industries dominated by conglomerates’ core business but decreases significantly in others. My findings suggest that firms’ internal organization has important consequences on the effects of trade policies. This paper was accepted by Gustavo Manso, finance.

Cartels, competition, and coalitions: the domestic drivers of international orders

Most theoretical and empirical accounts of trade politics focus on political conflict among competing private interest groups and over policies between the dichotomy of trade liberalization and protectionism. This article challenges this conceptualization by arguing that issues of antitrust, market power, and competition are central to the politics over free trade, and that in this domain state actors are comparatively more important. Original archival evidence from the American New Deal and post-war foreign economic policy shows that post-war free-trade policies were heavily influenced by views, formed in the 1930s, about domestic industrial organization and antitrust. These preferences were then pushed into international economic policy during and after World War II through trade negotiations, extraterritorial application of American law, and pressure for domestic competition laws abroad. In one of the most prominent episodes of trade liberalization, an antitrust campaign and debate permeated trade issues, based in independent state learning and economic preferences.

Trade Liberalization and Chinese Students in US Higher Education

We investigate whether trade liberalization encourages Chinese student enrollment in US universities. We focus on China's accession to the World Trade Organization and show that Chinese cities more exposed to this trade liberalization episode sent more students to US universities. Results indicate that growth in housing income/wealth was an important channel that allowed many Chinese families to afford US tuition, consistent with large growth in the share of Chinese students that finance their studies primarily using personal funds. Other potential mechanisms, such as changing returns to education or information flows, appear to play less of a role. We also inform distributional consequences for the US. Trade liberalization induced increases in the share of Chinese students studying non-STEM fields, at the Bachelors level, and also at less-selective US universities. Student inflows were similar in both low and high human capital areas in the US, indicating that educational exports do not exacerbate regional inequality. An important conclusion of our work is that the trade deficit in goods partially cycles back as a surplus in education exports to China.

The life-cycle dynamics of exporters and multinational firms

This paper studies the life-cycle dynamics of exporters and multinational enterprises (MNEs). Using rich firm-level data, we document a comprehensive set of facts on entry, exit, and growth of new exporters and new MNEs. Guided by these facts, we build a model based on the standard proximity-concentration trade-off extended to incorporate time-varying firm productivity and sunk costs of MNE entry. The calibrated version of the model goes far in matching cross-sectional and dynamic moments of the data on exporters and MNEs. Our results point to much higher sunk costs for MNE than for export activities. Finally, we show how including the choice to become an MNE affects the predicted export dynamics after a trade liberalization episode.

Old before their time: the role of employers in retirement decisions

Do elderly workers retire early voluntarily, or are they induced to retire by their employers? We consider an exogenous shock due to a trade agreement between Switzerland and the EU—the mutual recognition agreement (MRA), which improved access to the EU market for Swiss firms. A vast literature suggests that these trade liberalization episodes lead firms to relocate and to innovate in order to increase productivity. This may lead to lower demand of skill obsolescent elderly workers and to higher demand of skilled workers. We use a difference in differences approach on Swiss Labor Force Survey data to compare early retirement behavior in treated MRA and control (non-MRA) industries in three periods (pre-liberalization, announcement, and implementation). We find an increase in early retirement in the MRA sector during the announcement period, which is stronger for larger firms, for exporting firms and for firms with a large age wage gap. We also find an increase in the share of graduates in all age groups. Wages are largely unaffected.

The Baker Hypothesis

In 1985, James A. Baker III's “Program for Sustained Growth” proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater openness to foreign investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the 10-year-period after stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.2 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the unprecedented increase in growth that has taken place in EMDEs since 1995. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Trade liberalization, agency problem and aggregate productivity

Evidence shows that trade liberalization mitigates the agency problem inside firms that have production inefficiencies and incentivizes these firms to improve management quality. In order to strengthen our understanding of this phenomenon, I propose an industry equilibrium trade model with heterogeneous firms. When an economy opens up to trade, managers of the least productive surviving firms are incentivized to exert more effort, although they face shrinking market size in the open economy. This leads to improved productivity within these firms. I then show that managerial incentives have a non-monotonic impact on the aggregate productivity gains from an episode of trade liberalization. Finally, I calibrate the model using plant-level data from Colombia, and find that the interaction between managerial incentives and trade liberalization has a quantitatively sizable effect on the productivity gains from trade.

Tax revenues and the fiscal cost of trade liberalization, 1792–2006

This article examines the impact of trade liberalization on government revenues. Using a new dataset on tax revenues for 130 countries between 1792 and 2006, we identify ninety-nine episodes of trade liberalization defined as a large fall in trade tax revenues not accompanied by a decrease in trade. Seven took place before World War One, seven in the interwar period, eighteen in the Bretton Woods period and the remainder after 1970. We examine the extent to which countries were able to recover the tax revenues lost by liberalizing trade by using other sources of revenue. We find that historical (pre-1970) trade liberalization episodes were unlikely to be accompanied by decreases in tax revenues, especially during the Bretton Woods era. In the recent period however, over 40% of the developing countries in our sample experience a fall in total tax revenues that lasts more than ten years after an episode of trade liberalization. Overall, trade liberalization led to larger and longer-lived declines in tax revenues in developing countries since 1970 than in today’s rich countries in the 19th and 20th centuries. Results are similar when we consider government expenditures, suggesting decreases in trade tax revenues negatively affect governments’ capacity to provide public services in many developing countries.

Revisiting the Link between Trade, Growth and Inequality: Lessons for Latin America and the Caribbean

We revisit the relationship between international trade, economic growth and inequality with a focus on Latin America and the Caribbean. The paper combines two approaches: First, we employ a cross-country panel framework to analyze the macroeconomic effects of international trade on economic growth and inequality considering the strength of trade connections as well as characteristics of countries’ export markets and products. Second, we consider event studies of past episodes of trade liberalization to extract general lessons on the impact of trade liberalization on economic growth and its structure and inequality. Both approaches consistently point to two broad messages: First, trade openness and connectivity to the center of the trade network has substantial macroeconomic benefits. Second, we do not find a statistically significant or economically sizable direct impact of trade on overall income inequality.

Revisiting the Link between Trade, Growth and Inequality: Lessons for Latin America and the Caribbean

We revisit the relationship between international trade, economic growth and inequality with a focus on Latin America and the Caribbean. The paper combines two approaches: First, we employ a cross-country panel framework to analyze the macroeconomic effects of international trade on economic growth and inequality considering the strength of trade connections as well as characteristics of countries’ export markets and products. Second, we consider event studies of past episodes of trade liberalization to extract general lessons on the impact of trade liberalization on economic growth and its structure and inequality. Both approaches consistently point to two broad messages: First, trade openness and connectivity to the center of the trade network has substantial macroeconomic benefits. Second, we do not find a statistically significant or economically sizable direct impact of trade on overall income inequality.

Does Input-Trade Liberalization Affect Firms’ Foreign Technology Choice?

This paper studies the impact of input-trade liberalization on firms’ decision to upgrade foreign technology embodied in imported capital goods. Our empirical analysis is motivated by a simple theoretical framework of endogenous technology adoption, heterogeneous firms and imported inputs. The model predicts a positive effect of input tariff reductions on firms’ technology choice to source capital goods from abroad. This effect is heterogeneous across firms depending on their initial productivity level. Relying on India’s trade liberalization episode in the early 1990s, we demonstrate that the probability of importing capital goods is higher for firms producing in industries that have experienced greater cuts on tariffs on intermediate goods. Only those firms in the middle range of the initial productivity distribution have benefited from input-trade liberalization to upgrade their technology.

Local Labor Market Conditions and Crime: Evidence from the Brazilian Trade Liberalization

This paper estimates the effect of local labor market conditions on crime in a developing country with high crime rates. Contrary to the previous literature, which has focused exclusively on developed countries with relatively low crime rates, we find that labor market conditions have a strong effect on homicides. We exploit the 1990s trade liberalization in Brazil as a natural experiment generating exogenous shocks to local labor demand. Regions facing more negative shocks experience large relative increases in crime rates in the medium term, but these effects virtually disappear in the long term. This pattern mirrors the labor market responses to the trade shocks. Using the trade liberalization episode to design an instrumental variables strategy, we find that a 10% reduction in expected labor market earnings (employment rate × earnings) leads to a 39% increase in homicide rates. Our results highlight an additional dimension of adjustment costs following trade shocks that has so far been overlooked in the literature.

Firm heterogeneity and the localization of economic activities

AbstractThis paper examines how market‐access strategies, via exports and FDI, respond to changes in the level of integration. Empirical evidence shows that both firm exports and multinational activity are affected by trade liberalization episodes. We account for the strong positive correlation between exports and FDI by developing a general‐equilibrium model featuring firm heterogeneity, trade and FDI with final and intermediate products. Different geographical spaces are considered to quantify the effect of a preferential trade agreement (PTA) on supply‐mode decisions, for both partner and excluded countries. The model sheds new light on the mechanisms through which geography reshapes the concentration of economic activities both inside and outside the PTA area.